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Topology of utility possibility frontiers of economies with Ramsey taxation

Murty, Sushama
(2009)
Topology of utility possibility frontiers of economies with Ramsey taxation.
Working Paper.
Economics Department, University of Warwick: University of Warwick.
The Warwick Economics Research Paper Series (TWERPS), Vol.20
(No.912).

Abstract

This paper establishes the generic size and structure of the second-best Pareto frontier and its various components in private ownership economies with Ramsey taxation. It provides conditions under which the second-best Pareto frontier of an economy with H consumers will have the expected structure of a H . 1-dimensional manifold. In a class of economies, it shows that, generically, while the jointly production and consumption inefficient component of the second-best Pareto manifold is a submanifold that also has a dimension equal to H . 1, the production efficient, consumption efficient, and the firstbest components are lower dimensional, and hence negligible in size, submanifolds. Thus, it formally demonstrates that the economies usually studied in the literature, where all second-best are production efficient, are extremely rare. Market prices cannot be used in lieu of social shadow prices in most economies for cost-benefit tests. This begs further research for recovering the true social shadow prices from the data in such economies.